In the Matter of the Bankruptcy of Peoples Department Stores Inc./Magasins a Rayons Peoples Inc
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People's Department Stores Ltd.(1992) Inc., Re, 2004 SCC 68, 2004 CSC 68, 2004... 2004 SCC 68, 2004 CSC 68, 2004 CarswellQue 2862, 2004 CarswellQue 2863... 2004 SCC 68, 2004 CSC 68 Supreme Court of Canada People's Department Stores Ltd.(1992) Inc., Re 2004 CarswellQue 2862, 2004 CarswellQue 2863, 2004 SCC 68, 2004 CSC 68,[2004] 3 S.C.R. 461,[2004] S.C.J. No. 64, 134 A.C.W.S.(3d) 548, 244 D.L.R.(4th) 564, 326 N.R. 267(Eng.), 326 N.R. 267(Fr.), 49 B.L.R.(3d) 165, 4 C.B.R.(5th) 215, J.E. 2004-2016, REJB 2004-72160 In the Matter of the Bankruptcy of Peoples Department Stores Inc./Magasins A rayons Peoples inc. Caron Belanger Ernst & Young Inc., in its capacity as Trustee to the bankruptcy of Peoples Department Stores Inc./Magasins a rayons Peoples inc. (Appellant) v. Lionel Wise, Ralph Wise and Harold Wise (Respondents) and Chubb Insurance Company of Canada/Compagnie d'assurance Chubb du Canada (Respondent) Iacobucci,* Major, Bastarache, Binnie, LeBel, Deschamps, Fish JJ. Heard: May 11, 2004 Judgment: October 29, 2004 Docket: 29682 Proceedings: affirming People's Department Stores Ltd. (1992) Inc., Re(2003), 2003 CarswellQue 145,(sub nom. Peoples Department Stores Inc. (Trustees of) v, Wise) 224 D.L.R.(4th) 509,[2003] R.J.Q. 796, 41 C.B.R.(4th) 225 (C.A. Que.); reversing People's Department Stores Ltd. (1992) Inc., Re (1998), (sub nom. Peoples Department Stores Inc.lMagasin rayons Peoples inc, (Syndic de)) [1999] R.R.A. 178, 1998 CarswellQue 3442, 23 C.B.R.(4th) 200 (C.S. Que.) Counsel: Gerald F. Kandestin, Gordon Kugler, Gordon Levine for Appellant Eric Lalanne, Martin Tetreault for Respondents, Lionel Wise, Ralph Wise, Harold Wise Ian Rose, Odette Jobin-Laberge for Respondent, Chubb Insurance Company of Canada Subject: Corporate and Commercial; Insolvency; Income Tax (Federal) APPEAL by bankruptcy trustee from judgment reported at People's Department Stores Ltd. (1992) Inc., Re (2003), 2003 CarswellQue 145,(sub nom. Peoples Department Stores Inc, (Trustees of) v, Wise) 224 D.L.R.(4th) 509,[2003] R.J.Q. 796, 41 C.B.R. (4th) 225 (C.A. Que.), allowing appeal by directors of bankrupt corporation from judgment allowing trustee's motion to recover funds of corporation and finding directors personally liable. POURVOI du syndic de faillite a rencontre de l'arret publie a People's Department Stores Ltd. (1992) Inc., Re (2003), 2003 CarswellQue 145, (sub nom. Peoples Department Stores Inc, (Trustees of) v. Wise) 224 D.L.R. (4th) 509, [2003] R.J.Q. 796, 41 C.B.R. (4th) 225 (C.A. Quo), qui a accueilli le pourvoi des administrateurs dune societe en faillite à l'encontre du jugement qui avait accueilli la requete en recouvrement des fonds de la societe presentee par le syndic et condamne personnellement les administrateurs, Major, Deschamps JJ.: I. Introduction 1 The principal question raised by this appeal is whether directors of a corporation owe a fiduciary duty to the corporation's creditors comparable to the statutory duty owed to the corporation. For the reasons that follow, we kly'sttl,,vNext cANAOA Copyright Thornsori Reuters Canada Limited or Its licensors (excluding individual court documents). All rights reserved. People's Department Stores Ltd. (1992) Inc., Re, 2004 SCC 68, 2004 CSC 68, 2004... 2004 SCC 68, 2004 CSC 68, 2004 CarswellQue 2862, 2004 CarswellQue 2863... conclude that directors owe a duty of care to creditors, but that duty does not rise to a fiduciary duty. We agree with the disposition of the Quebec Court of Appeal• The appeal is therefore dismissed. 2 As a result of the demise in the mid-1990s of two major retail chains in eastern Canada, Wise Stores Inc,("Wise") and its wholly-owned subsidiary, Peoples Department Stores Inc. ("Peoples"), the indebtedness of a number of Peoples' creditors went unsatisfied. In the wake of the failure of the two chains, Caron Belanger Ernst & Young Inc., Peoples' trustee in bankruptcy (tlie "trustee"), brought an action against the directors of Peoples• To address the trustee's claims, the extent of the duties imposed by s. 122(1) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA"), upon directors with respect to creditors must be determined; we must also identify the purpose and reach of s. 100 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). 3 In our view, it has not been established that the directors of Peoples violated either the fiduciary duty or the duty of care imposed by s. 122(1) of the CBCA• As for the trustee's submission regarding s. 100 of the BIA, we agree with the Court of Appeal that the consideration received in the impugned transactions was not "conspicuously" less than fair market value. The BIA claim fails on that basis. IL Background 4 Wise was founded by Alex Wise in 1930 as a small clothing store on St-Hubert Street in Montreal. By 1992, through expansion effected by a mix of internal growth and acquisitions, it had become an enterprise operating at 50 locations with annual sales of approximately $100 million, and it had been listed on the Montreal Stock Exchange in 1986. The stores were, for the most part, located in urban areas in Quebec. The founder's three sons, Lionel, Ralph and Harold Wise (the "Wise brothers"), were majority shareholders, officers, and directors of Wise, Together, they controlled 75 percent of the firm's equity, 5 In 1992, Peoples had been in business continuously in one form or another for 78 years. It had operated as an unincorporated division of Marks & Spencer Canada Inc.("M & S") until 1991, when it was incorporated as a separate company. M & S itself was wholly owned by the large British firm, Marks & Spencer plc. ("M & S plc."). Peoples' 81 stores were generally located in rural areas, from Ontario to Newfoundland. Peoples had annual sales of about $160 million, but was struggling financially, Its annual losses were in the neighbourhood of $10 million, 6 Wise and Peoples competed with other chains such as Canadian Tire, Greenberg, Hart, K-Mart, M-Stores, Metropolitan Stores, Rossy, Woolco and Zellers, Retail competition in eastern Canada was intense in the early 1990s. In 1992, M-Stores went bankrupt. In 1994, Greenberg and Metropolitan Stores followed M-Stores into bankruptcy. The 1994 entry of Wal-Mart into the Canadian market, with its acquisition of over 100 Woolco stores from Woolworth Canada Inc., exerted significant additional competitive pressure on retail stores, 7 Lionel Wise, the eldest of the three brothers and Wises executive vice-president, had expressed an interest in acquiring the ailing Peoples chain from M & S as early as 1988, Initially, M & S did not share Wise's interest for the sale, but by late 1991, M & S plc., the British parent company of M & S, had decided to divest itself of all its Canadian operations. At this point, M & S incorporated each of its three Canadian divisions to facilitate the anticipated divestiture thereof. 8 The new-found desire to sell coincided with Wise's previously expressed interest in acquiring its larger rival. Although M & S had initially hoped to sell Peoples for cash to a large firm in a solid financial condition, it was unable to do so, Consequently, negotiations got underway with representatives of Wise. A formal share purchase agreement was drawn up in early 1992 and executed in June 1992, with July 16, 1992 as its closing date. 9 Wise incorporated a company, 2798832 Canada Inc., for the purpose of acquiring all of the issued and outstanding shares of Peoples from M & S. The $27- million share acquisition proceeded as a fully leveraged buyout. The portion of the purchase price attributable to inventory was discounted by 30 percent. The discount was designed to inject equity into Peoples in the fiscal year following the sale and to make use of some of the tax losses that had accumulated in prior years. Vi.:“'•t[a.v•-.Next• CANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. People's Department Stores Ltd.(1992) Inc., Re, 2004 SCC 68, 2004 CSC 68, 2004... 2004 SCC 68, 2004 CSC 68, 2004 CarswellQue 2862, 2004 CarswellQue 2863... 10 The amount of the down payment due to M & S at closing, $5 million, was borrowed from the Toronto Dominion Bank (the "TD Bank"). According to the terms of the share purchase agreement, the $22-million balance of the purchase price would be carried by M & S and would be repaid over a period of eight years, Wise guaranteed all of 2798832 Canada Inc.'s obligations pursuant to the terms of the share purchase agreement. 11 To protect its interests, M & S took the assets of Peoples as security (subject to a priority in favour of the TD Bank) and negotiated strict covenants concerning the financial management and operation of the company. Among other requirements, 2798832 Canada Inc. and Wise were obligated to maintain specific financial ratios, and Peoples was not permitted to provide financial assistance to Wise. In addition, the agreement provided that Peoples could not be amalgamated with Wise until the purchase price had been paid. This prohibition was presumably intended to induce Wise to refinance and pay the remainder of the purchase price as early as possible in order to overcome the strict conditions imposed upon it under the share purchase agreement. 12 On January 31, 1993, 2798832 Canada Inc. was amalgamated with Peoples. The new entity retained Peoples' corporate name.